Unemployment affects your credit but you can minimise the damage. Here’s how.

Juliet D'cruz

Updated on:

Being unemployed is a stressful experience and its negative effects go beyond the simple lack of income. Poor employment history can be a lifelong barrier to getting loans. It can also limit your access to low interest rates for years.

Unfortunately, more people than ever face the prospect of bad credit today because of the ongoing economic side-effects of the pandemic. However, a poor credit score is not a foregone conclusion even if you are currently unemployed. 

Here are three steps you can take to stabilise and even repair your credit even without a job.

Participate in the gig economy

Work-from-home (WFH) was already a growing phenomenon before the pandemic forced us all to work that way. With more employers embracing this approach today, there is a steady flow of opportunities for anyone who is not formally employed.

Freelance work gives you a massive advantage because it demonstrates your desire to work even when you did not have a regular job. Credit assessment agencies like Credit Bureau Singapore (CBS) factor this into their calculations. 

It is not just a great asset for your credit rating but also if you want a personal loan from a licensed money lender Singapore. Legal moneylenders interpret informal employment as a sign that you are willing to shoulder responsibility.

However, you will need to keep clear records as proof of employment. Send formal invoices to your clients and keep track of your income transactions through your bank and other payment channels. Declare that income in your taxes so that there is a formal local government record, too.

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Control credit card expenditure

Unless you have adequate savings, one of the first places to reflect your lack of employment is your credit card bill. Because credit card debt is one of the major factors in assessing your eligibility for a loan, a sudden, steep increase reflects poorly on your credit score.

The central issue here is ‘credit utilisation’. This is the ratio of your current debt to the maximum debt you are allowed. The higher your credit utilisation, the higher a risk you are on paper as a borrower. If your credit utilisation remains high for a long period, creditors see you as high-risk.

You may be tempted to cancel a credit card and stop paying fees, or to avoid the possibility of overspending. If possible, don’t. A diverse range of credit lines improves your credit score. It shows creditors that you can manage and maintain complicated financial obligations.

This can be a problem for many Singaporeans who don’t have savings. However, if there was a ‘best’ time to be unemployed, it is now. Whatever the reason for you not working, it all gets swept into the ‘pandemic’ basket. So, keep your credit cards but try to limit spending on them to boost your credit rating.

Speak to your creditors

The single biggest error that you can make when it comes to your credit score is to default on a debt. It does not matter if it is credit card debt, a personal loan, car loan, or home loan. Late payments, and worse, missed payments will have a catastrophic long-term impact on your credit score.

Although it may sometimes seem the opposite, your creditors have no interest in seeing you default on your loans. They would much rather you continue making payments in line with your unemployment situation.

If you are struggling with debts and no longer have a job, make an appointment to speak with them. Most lenders will work out a reasonable repayment plan. If the circumstances are really dire, some may even agree to suspend repayments for a certain period.

Just as it is with credit cards, managing multiple debts when you are unemployed will improve your credit score in the long run.

Putting it all together

Good debt management is a combination of all three of these factors and they are all interrelated when you are unemployed. 

Freelance employment helps you maintain your savings instead of relying exclusively on your credit card. Meanwhile, a reasonable level of credit card debt strengthens your credit score even when you don’t have a regular job. A revised repayment plan with your creditors helps you manage your finances and maintain good credit.

Don’t be afraid to approach a licensed money lender Singapore for a small personal loan if you are struggling. 

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